Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Tuesday, October 05, 2010

SEC Delays Proxy Access Rule Pending Judicial Review

The SEC has stayed the effectiveness of its recently-adopted proxy access rules at the request of the US Chamber of Commerce and the Business Roundtable until the resolution of a federal court challenge to the rules currently being mounted by the business groups. Securities Act Release No. 9149. The Chamber and Buhsines Roundtable have asked a federal appeals court to invalidate the SEC proxy access rule, Exchange Act Rule 14a-11. In a petition to the US Court of Appeals for the District of Columbia, the business groups said that Rule 14a-11 is arbitrary and capricious, violates the Administrative Procedure Act, and was adopted without a proper assessment of its effect on efficiency, competition, and capital formation. The petition also asserts that the rule violates company rights under the First and Fifth Amendments. At the same time, the business groups asked the SEC to stay the rule's effect until the litigative challenge is resolved. While the Dodd-Frank Act specifically authorized the SEC to adopt the proxy access rule in an effort to insulate the SEC from a challenge to its rulemaking authority, the business groups said that the Dodd-Frank provision does not exempt the SEC from following the law when it conducts rulemaking.

Although the business grouos did not challenge related amendments to Rule 14a-8, the shareholder proposal rule, the SEC also stayed the effectuveness of the changes to that rule. The Commission reasoned that, since the amendment to Rule 14a- 8 was designed to complement Rule 14a-11 and is intertwined with it, there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.

The SEC acted pursuant to Section 25(c)(2) of the Exchange Act and Section 705 of the Administrative Procedure Act, which both give the Commission the discretion to stay its own rules pending judicial review upon a finding that justice so requires.

In a brief filed with the SEC stay petition. the groups said that the SEC erred in appraising the costs of the rule. The SEC did not dispute evidence that hotly contested elections would be costly, but hypothesized that such elections may not occur since directors may decide not to oppose shareholder nominees. This hypothesis conflicts with the directorial fiduciary duties, said the brief, since such duty may compel company directors to spend significant amounts to defeat shareholder nominees they believe to be unqualified. More broadly, the brief, which was signed by Eugene Scalia of Gibson Dunn, noted that proxy access has been one of the most contentious issues in the history of the SEC because disagreements over a proxy access rule prefigure the disagreements that will emerge when proxy access is actually used.